## _cr15219

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### Recent macro-financial context and headline indicators
- Lower oil prices have eroded fiscal and external surpluses, but negative effects on UAE economic activity have been limited since mid-2014.  
- Nonhydrocarbon growth: 4.8 percent in 2014.  
- Hydrocarbon growth: picked up to 4 percent (oil production in first five months of 2015 remained on elevated levels).  
- Inflation: increased to 4.3 percent year-on-year in May 2015.  
- Current account surplus: 13.7 percent of GDP in 2014.  
- Real effective exchange rate (REER): appreciated by 3.3 percent in 2014, and by 9 percent in Q1 2015 compared to the average 2014 level.  
- Fiscal outcomes (preliminary 2014): overall fiscal surplus declined to 5 percent of GDP (from 10.4 percent in 2013). Adjusted nonhydrocarbon deficit increased to 36.7 percent of nonhydrocarbon GDP (from 35.4 percent in 2013). Fiscal break-even oil price increased to $78 (from $69 in 2013).

### Real estate market developments
- Market cooling and prices:
  - Sales price increases moderated in Dubai and Abu Dhabi by end-2014; in March 2015 growth in residential sales prices turned slightly negative in both Emirates (Reidin data, year-on-year).  
  - Drivers: increased supply (particularly in Dubai); reduced demand associated with lower oil prices and appreciating US dollar; tighter mortgage regulations (loan-to-value ratios); increased property transfer fee in late 2013.  
  - Near-term expectations: Dubai sales prices expected to further decline over the course of the year; constrained supply through 2017 expected to support prices in Abu Dhabi.
- Rents and yields:
  - Pace of rent increases (new contracts only) slowed in Q1 2015.  
  - Rent component in CPI (existing and new contracts) has been a major driver of inflation since September 2014.  
  - Price-to-rent ratios: declined since mid-2014 in both metropolitan areas (indicating a correction).  
  - Gross rental yields: rose since mid-2014, registering a 6 percent year-on-year increase in March 2015.
- Sectoral segments:
  - Hotel market: buoyant in Dubai in 2014, but fall in oil prices and US dollar appreciation expected to weigh on 2015 performance.  
  - Office market vacancy rates: 23 percent in Dubai and 25 percent in Abu Dhabi. New supply in 2015 expected to put downward pressure on office rents in Dubai.  
  - Retail rents: rose rapidly in Dubai until mid-2014; growth slowed in late-2014; forthcoming supply expected to slow price growth further in 2015.

### Banking sector, credit, and GREs
- Credit and deposits:
  - Credit to economy: lending to private sector picked up to 11.5 percent year-on-year in December 2014 and to 3 percent year-to-April 2015. Credit to private sector is projected to slow to 7.2 percent in 2015.  
  - Domestic deposit growth slowed to reach 2.2 percent by April 2015.
- Banking soundness indicators (national banks, most recent figures):
  - Capital adequacy ratio: around 18.2–19.9 (percent range across years).  
  - Return on assets: 1.7 percent.  
  - Return on equity: 13.6.  
  - Nonperforming loans to total loans: 7.0.  
  - Provisions to nonperforming loans: 102.0.
- Liquidity and profitability:
  - Banking system remains profitable with a return on assets at 1.7 percent due to higher net interest margins, non-interest income, and operational efficiency.  
  - Liquidity buffers built up earlier helped reduce market and liquidity risks.
- GREs and public sector debt:
  - Dubai major restructurings from 2008/9 completed; several GREs made early repayments and Dubai World rescheduled a large maturity due in 2018.  
  - Total government and GRE debt in Dubai: 136 percent of Dubai GDP. Dubai’s total government and GRE debt noted as around US$143 billion, with about half of it falling due in 2015–20.  
  - In Abu Dhabi, GREs have substantially reduced their debt and upcoming maturities in the medium term are significantly lower than levels expected last year.

### Outlook and projections
- Growth and inflation:
  - Nonhydrocarbon growth: projected to slow to 3½ percent in 2015, then increase to 4½ percent in the medium term.  
  - Hydrocarbon production: expected to moderate given global supply glut.  
  - Inflation: projected to pick up to 3¾ percent in 2015 due to level effects, then decline year-on-year in coming months and stabilize around 3 percent over the medium term.
- Credit and external:
  - Credit: private sector credit expected to slow to 7.2 percent in 2015 and increase over the medium term as private investment accelerates.  
  - Current account surpluses: projected to decline substantially in 2015 due to lower oil prices and slowly increase with gradual recovery in oil prices.

### Risks (staff assessment)
- Medium-to-high macroeconomic risks from persistently low energy prices and increased volatility.
  - A $10 drop in oil prices would reduce fiscal and external balances by 2⅓ and 2¾ percentage points of GDP, respectively, assuming no policy response.  
  - A permanent $10 drop in oil prices could reduce UAE GDP level by 1.5 percentage points after 5 years assuming revenue losses are fully offset with expenditure cuts.
- External financial risks:
  - Side-effects from global financial conditions (surge in financial volatility, persistent dollar strength): higher US interest rates could trigger capital flow reversals, sustained increases in risk premiums, and GRE rollover strains; effective appreciation could reduce inflation but harm competitiveness.
- Domestic risks:
  - Imprudent risk-taking and re-leveraging by Dubai GREs and private companies; megaprojects implemented imprudently could create macro-financial risks given the existing debt overhang.
- Other scenarios:
  - Geopolitical deterioration could raise global energy prices and support the UAE’s external position.
- Staff-assessed probabilities: specified as “medium” or “high” for these risks in the RAM.

### Policy recommendations and responses
- Fiscal policy:
  - Resume fiscal consolidation in a gradual way—considering large buffers—to reduce fiscal vulnerabilities and ensure intergenerational equity while limiting negative effects on growth.  
  - Rationalize spending while preserving government investments relative to nonhydrocarbon GDP to support infrastructure.  
  - Control public sector wage bill growth; reduce energy subsidies and capital/other transfers.  
  - Consider raising more nonhydrocarbon revenues through new tax measures.
- GREs and public debt management:
  - Mitigate Dubai’s macro-financial vulnerabilities by reducing contingent liabilities through deleveraging and reforming GREs; prioritize and sequence major projects; assess quality of planned spending; contain GRE risk-taking; improve GRE risk management, reporting, and corporate governance.  
  - Avoid transferring maturing GRE debt to domestic banks; raise risk-weights on GRE lending if needed; Dubai government should collect and publish information on Dubai GRE debt (staff recommendation).
- Banking and financial stability:
  - Strengthen banking system resilience: ensure adequate capitalization and liquidity; avoid transferring maturing GRE debt to domestic banks; develop domestic debt markets to reduce GRE reliance on the banking sector and external financing.  
  - Strengthen macroprudential, regulatory, and supervisory frameworks; continue improving availability of information on Dubai GRE debt; further strengthen the toolkit for enforcing bank supervision (included in central bank draft law); continue strengthening the regime for AML/CFT (recent regulation enhances requirement to identify beneficial owners, including those of deposits).  
  - Introduce capital and liquidity macroprudential tools; publish a financial stability report on a regular basis; formalize a financial stability mandate in the central bank law; establish a Financial Stability Committee; institutionalize coordination with the Ministry of Finance and other relevant agencies.
- Market and liquidity measures:
  - Maintain the peg; strengthen liquidity management and deepen money markets; in an adverse scenario with a decline in deposits, liquidity management could be eased to support credit growth; government deficit financing should avoid tightening banking system liquidity.
- Structural reforms:
  - Strengthen business environment (enforcing contracts, resolving insolvency); transition toward a knowledge-driven economy through better quality education, promotion of innovation and new technologies; implement labor market reforms to incentivize private sector employment of nationals; improve labor market statistics.  
  - Enhance SME access to credit: strengthen credit assessment tools and creditors’ rights (adopt insolvency law); separate development and financing functions in public spending; focus public support on seed money or guarantees for startups/SMEs.
- Statistics and governance:
  - Strengthen annual budget processes, Public Finance Management Systems, and operationalize medium-term budget frameworks; implement inter-agency project to compile the International Investment Position; provide adequate resources to improve balance of payments statistics; develop more comprehensive demographic and labor market statistics; disseminate complete data on Dubai GRE debt.

### Box: The Economic Impact of the Removal of Iran Sanctions
- Impact on UAE nonhydrocarbon economy:
  - Easing of sanctions on Iran would benefit the nonhydrocarbon economy in the UAE, particularly in Dubai, through increased trade and financial flows.  
  - If sanctions are lifted, Iran is expected to gradually step up oil production from current levels and bring oil in floating storage to the market, posing a modest downside risk for oil prices while increasing demand from Iran for UAE goods and services.
- Trade and exports with Iran:
  - Exports to Iran in 2013: US$12 billion, accounting for 12 percent of the UAE’s total nonoil exports.  
  - Iran was the UAE’s most important export destination after India in 2013.  
  - Exports to Iran consist largely of re-exported goods that cycle through the UAE’s port infrastructure.
- Simulation results:
  - A reversal of sanctions could add 1 percentage point to real GDP growth over 2016-18 through higher nonhydrocarbon exports alone (simulation model result).  
  - Model caveats: assumes trade with Iran would gradually return to pre-sanctions trend; about one-quarter of the gap is assumed permanently lost; NBS data may not be comprehensive; alternative sources show different estimates.
- Services and indirect effects:
  - Agreement would boost demand from Iran for UAE services exports such as trade finance, transportation, tourism, and hospitality.  
  - Dubai hotel guests arriving from Iran have dropped by almost half since 2010, used as a proxy for recent business and tourism activity.  
  - If sanctions are lifted, additional indirect impact of spending by tourists and business travelers in the broader economy could be significant.

### Fiscal projections and long-term fiscal sustainability (Annex I and Tables)
- Selected long-term baseline assumptions after 2020:
  - flat hydrocarbon production; annual oil price growth of 2 percent; inflation growth of 2 percent; population growth of 1.5 percent; real return on assets of 4 percent.
- Main findings:
  - The gap between the projected deficits and the deficits consistent with a constant real per capita annuity is 11 percent of nonhydrocarbon GDP in 2014.  
  - With fiscal consolidation assumed in the baseline, the gap is projected to almost disappear by 2020.  
  - If consolidation continues at the same pace beyond the forecast period, the fiscal stance would be fully consistent with intergenerational equity by 2022.  
  - An alternative annuity approach would imply a negative gap of 9 percent of nonhydrocarbon GDP in 2020.

### Debt sustainability and shock scenarios (Annex II highlights)
- UAE Government DSA baseline indicators (selected):
  - Nominal gross government debt: 17.4 (2013); 16.4 (2014); 14.3 (2015); 16.4 (2016); 15.2 (2017); 14.2 (2018); 13.2 (2019); 12.4 (2020).  
  - Government gross financing needs: -10.8 (2013); -8.6 (2014); -2.1 (2015); 4.9 (2016); 1.8 (2017); 0.6 (2018); 2.8 (2019); -2.6 (2020).
- Alternative scenario outcomes:
  - Oil price shock (lower by $10 in 2016-20): primary balance would deteriorate to 3.5 percent of GDP in 2020, with government debt rising to 24 percent of GDP.  
  - GRE contingent liability scenario (20 percent of GRE debt taken over by government in 2016-20): primary balance would deteriorate to 4.8 percent of GDP in 2020, with government debt increasing to 18 percent of GDP.  
  - Combined scenario (oil price shock + GRE contingent liability): primary balance would deteriorate to 2.4 percent of GDP in 2020, with debt rising to 31 percent of GDP.

### Dubai government debt stress tests and outcomes
- Baseline government debt (percent of Dubai GDP): 37.0 (2012); 34.5 (2013); 31.3 (2014); 29.9 (2015); 27.6 (2016); 25.5 (2017); 23.0 (2018); 22.3 (2019); 20.9 (2020); debt-stabilizing primary balance -0.7.
- Alternative scenarios:
  - A1. Real GDP growth shock: increases debt modestly; debt-stabilizing primary balance -0.5.  
  - A2. Global downturn scenario: debt increases to about 31.8 percent of GDP in 2017 with debt-stabilizing primary balance -0.1.  
  - A3. Real estate shock with global slowdown (government takes over 20 percent of GREs debt): debt-to-GDP ratio could rise to about 54 percent in 2020; debt-stabilizing primary balance 3.4.
- Quantitative outcomes:
  - Sharp decline in GDP growth in 2015 (by ¾ of standard deviation) would raise the debt-to-GDP ratio by about 6 percentage points in 2020 compared to the baseline.  
  - Severe global downturn scenario would raise Dubai’s government debt to about 32 percent of GDP in 2020.  
  - Combined global downturn with real estate shock would increase government debt-to-GDP ratio to about 54 percent in 2020.

### External sector assessment (Annex III) — key points
- Exchange rate peg:
  - Staff believes the peg to the U.S. dollar serves the UAE well; adjustment of external imbalances should occur through fiscal consolidation rather than exchange rate devaluation.
- Current account and terms of trade:
  - The current account surplus declined to 14 percent of GDP in 2014, from 18 percent in 2013.  
  - The current account is projected to decline further to about 6 percent of GDP on average in 2015-20.  
  - The dirham appreciated by 13 percent in Q1 2015 year-on-year in real effective terms.  
  - The terms of trade fell by 8 percent in 2014 and are projected to decline by 19 percent in 2015.
- External buffers and reserves:
  - Central bank reserves are projected at US$72 billion (2015 projection).  
  - Reserves cover: 4 months of imports (net of re-exports); 70 percent of short-term debt; 21 percent of broad money.  
  - Combined with estimated assets in sovereign wealth funds, buffers are well above the range recommended by the Fund’s reserve adequacy metric.

### Macro-financial linkages and VAR findings (Annex IV)
- Hydrocarbon sector share: represents 40 percent of UAE GDP.
- VAR (annual data 1993–2014, one lag; Choleski ordering: oil price, non-hydrocarbon GDP, NPLs) empirical elasticities (on impact and after 3 years, accumulated):
  - Non-oil GDP to oil price: 0.057* (on impact), -0.021 (after 3 years).  
  - NPLs to oil price: -0.014* (on impact), -0.061* (after 3 years).  
  - NPLs to non-oil GDP: -0.106* (on impact), -0.185* (after 3 years).  
  - Non-oil GDP to NPLs: -2.990* (on impact), -1.760 (after 3 years).  
  - *Statistically significant at 5 percent.
- Interpretation:
  - Lower oil prices reduce non-oil GDP (elasticity of 0.057 on impact) and increase NPLs (semi-elasticity of -0.014 on impact) over a year.  
  - Negative feedback loops between NPLs and non-oil GDP can develop on impact; after 3 years the response of non-oil GDP to an increase in NPLs is not statistically significant, possibly due to authorities’ interventions.

### Islamic finance — growth, risks, and policy recommendations (Annex V)
- Size and growth:
  - Islamic assets have grown by about 13 percent annually for the past five years.  
  - Islamic banks (IBs) assets reached 17 percent of the total banking sector assets (corresponding to US$107 billion) by end-2014.  
  - IBs held 19 percent of total deposits and 18 percent of total financing by end-2014.  
  - Two banks account for almost 65 percent of total Islamic assets (5.3 percent and 5.1 percent of the total banking sector assets).
- Financial soundness indicators (2014, aggregates and comparisons):
  - Total assets (Total): 2,304,869 (millions of AED); Total assets (CBs): 1,912,948; Total assets (IBs): 391,921.  
  - Equity to total assets: 12.8 / 13.8 / 10.4 (Total / CBs / IBs).  
  - NPLs to total loans: 7.0 / 6.8 / 7.9.  
  - Capital adequacy ratio: 18.1 / 18.9 / 14.9.  
  - Return on assets: 2.1 / 2.2 / 1.8.
- Risks and gaps:
  - IB-specific risks: liquidity risk; concentration risk; Shari'ah compliance risk; displaced commercial risk; investment risk.  
  - Regulatory gaps: law on Islamic banking exists but no specific supervisory regime for IBs; Islamic windows operate in conventional regulatory framework; no formal bank resolution framework, including no deposit guarantee scheme.
- Policy recommendations:
  - Develop tailor-made regulation and risk-based supervision for IBs; implement targeted oversight of Islamic windows.  
  - Strengthen Shari'ah governance: enforce independence, transparency, and accountability of Shari'ah Boards; subject members to “fit and proper” requirements; accelerate establishment of a National Shari'ah Board with binding mandate.  
  - Develop tailor-made governance for IBs to enhance transparency and involve investment depositors in decision making.  
  - Consider defining tailor-made macroprudential tools for IB liquidity and investment risks; introduce specific reporting requirements for IB liquidity management; include mudaraba instruments appropriately in liquidity ratios and Net Stable Funding Ratio implementation (January 2018).  
  - Consider establishing explicit safety nets and a banking resolution framework that account for Islamic finance specificities.

*Source: UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND*

### 1. Real Estate Developments ______________________________________________________________________ 6

### 1. Real Estate Developments

### Recent macro-financial context and headline indicators
- Lower oil prices have eroded fiscal and external surpluses, but negative effects on UAE economic activity have been limited since mid-2014.  
- Nonhydrocarbon growth: 4.8 percent in 2014.  
- Hydrocarbon growth: picked up to 4 percent (oil production in first five months of 2015 remained on elevated levels).  
- Inflation: increased to 4.3 percent year-on-year in May 2015.  
- Current account surplus: 13.7 percent of GDP in 2014.  
- Real effective exchange rate (REER): appreciated by 3.3 percent in 2014, and by 9 percent in Q1 2015 compared to the average 2014 level.  
- Fiscal outcomes (preliminary 2014): overall fiscal surplus declined to 5 percent of GDP (from 10.4 percent in 2013). Adjusted nonhydrocarbon deficit increased to 36.7 percent of nonhydrocarbon GDP (from 35.4 percent in 2013). Fiscal break-even oil price increased to $78 (from $69 in 2013).

### Real estate market developments (Box 1)
- Market cooling: Sales price increases moderated in Dubai and Abu Dhabi by end-2014; in March 2015 growth in residential sales prices turned slightly negative in both Emirates (Reidin data, year-on-year).  
- Drivers of cooling: increased supply (particularly in Dubai); reduced demand associated with lower oil prices and appreciating US dollar; tighter mortgage regulations (loan-to-value ratios); increased property transfer fee in late 2013.  
- Near-term expectations: Dubai sales prices expected to further decline over the course of the year; constrained supply through 2017 expected to support prices in Abu Dhabi.  
- Rents: Pace of rent increases (new contracts only) slowed in Q1 2015. Rent component in CPI (existing and new contracts) has been a major driver of inflation since September 2014.  
- Price-to-rent ratios: declined since mid-2014 in both metropolitan areas (indicating a correction).  
- Gross rental yields: rose since mid-2014, registering a 6 percent year-on-year increase in March 2015.  
- Hotel market: buoyant in Dubai in 2014, but fall in oil prices and US dollar appreciation expected to weigh on 2015 performance.  
- Office market vacancy rates: 23 percent in Dubai and 25 percent in Abu Dhabi. New supply in 2015 expected to put downward pressure on office rents in Dubai.  
- Retail rents: rose rapidly in Dubai until mid-2014; growth slowed in late-2014; forthcoming supply expected to slow price growth further in 2015.

### Banking sector, credit, and GREs
- Credit to economy: lending to private sector picked up to 11.5 percent year-on-year in December 2014 and to 3 percent year-to-April 2015. Credit to private sector is projected to slow to 7.2 percent in 2015.  
- Domestic deposit growth slowed to reach 2.2 percent by April 2015.  
- Banking soundness indicators (national banks): capital adequacy ratio around 18.2–19.9 (percent range across years), return on assets at 1.7 percent (most recent), return on equity 13.6 (most recent), nonperforming loans to total loans 7.0 (most recent), provisions to nonperforming loans 102.0 (most recent). (Data labeled as Bank Financial Soundness Indicators.)  
- Liquidity and profitability: banking system remains profitable with a return on assets at 1.7 percent due to higher net interest margins, non-interest income, and operational efficiency. Liquidity buffers built up earlier helped reduce market and liquidity risks.  
- Stock markets: declined by 8.8 percent in April 2015 year-on-year (average for Abu Dhabi and Dubai).  
- GREs (government-related entities): Dubai major restructurings from 2008/9 completed; several GREs made early repayments and Dubai World rescheduled a large maturity due in 2018. Nevertheless, total government and GRE debt in Dubai remains significant at 136 percent of Dubai GDP. Dubai’s total government and GRE debt noted as around US$143 billion, with about half of it falling due in 2015–20. In Abu Dhabi, GREs have substantially reduced their debt and upcoming maturities in the medium term are significantly lower than levels expected last year.

### Outlook and projections
- Nonhydrocarbon growth: projected to slow to 3½ percent in 2015, then increase to 4½ percent in the medium term (supported by megaprojects and private investment ahead of Expo 2020).  
- Hydrocarbon production: expected to moderate given global supply glut.  
- Inflation: projected to pick up to 3¾ percent in 2015 due to level effects, then decline year-on-year in coming months and stabilize around 3 percent over the medium term.  
- Credit: private sector credit expected to slow to 7.2 percent in 2015 and increase over the medium term as private investment accelerates.  
- Current account surpluses: projected to decline substantially in 2015 due to lower oil prices and slowly increase with gradual recovery in oil prices.

### Risks (from Risk Assessment Matrix and narrative)
- Staff-assessed medium-to-high macroeconomic risks from persistently low energy prices and increased volatility.  
  - A $10 drop in oil prices would reduce fiscal and external balances by 2⅓ and 2¾ percentage points of GDP, respectively, assuming no policy response.  
  - A permanent $10 drop in oil prices could reduce UAE GDP level by 1.5 percentage points after 5 years assuming revenue losses are fully offset with expenditure cuts.  
- Side-effects from global financial conditions (surge in financial volatility, persistent dollar strength): higher US interest rates could trigger capital flow reversals, sustained increases in risk premiums, and GRE rollover strains; effective appreciation could reduce inflation but harm competitiveness.  
- Domestic risks: imprudent risk-taking and re-leveraging by Dubai GREs and private companies; megaprojects implemented imprudently could create macro-financial risks given the existing debt overhang.  
- Other scenario: geopolitical deterioration could raise global energy prices and support the UAE’s external position.  
- Staff-considered probabilities: specified as “medium” or “high” for these risks in the RAM.

### Policy recommendations and responses highlighted
- Resume fiscal consolidation in a gradual way—considering large buffers—to reduce fiscal vulnerabilities and ensure intergenerational equity while limiting negative effects on growth.  
- Mitigate Dubai’s macro-financial vulnerabilities by reducing contingent liabilities through deleveraging and reforming GREs; prioritize and sequence major projects; assess quality of planned spending; contain GRE risk-taking; improve GRE risk management, reporting, and corporate governance.  
- Strengthen banking system resilience: ensure adequate capitalization and liquidity; avoid transferring maturing GRE debt to domestic banks; develop domestic debt markets to reduce GRE reliance on the banking sector and external financing.  
- Strengthen macroprudential, regulatory, and supervisory frameworks; continue improving availability of information on Dubai GRE debt; further strengthen the toolkit for enforcing bank supervision (included in central bank draft law); continue strengthening the regime for AML/CFT (recent regulation enhances requirement to identify beneficial owners, including those of deposits).  
- Strengthen fiscal policy coordination, adopt medium-term fiscal frameworks, and improve economic statistics and the annual budget process (federal MOF and Dubai DOF have strengthened budget processes and developed medium-term frameworks; Abu Dhabi DOF submitted draft medium-term budget framework under the Abu Dhabi Comprehensive Financial Plan).

*Source: IMF staff.*

### Box 2. The Economic Impact of the Removal of Iran Sanctions

### Box 2. The Economic Impact of the Removal of Iran Sanctions

### Impact on UAE nonhydrocarbon economy
- Easing of sanctions on Iran would benefit the nonhydrocarbon economy in the UAE, particularly in Dubai, through increased trade and financial flows.
- If sanctions are lifted, Iran is expected to gradually step up oil production from current levels and bring oil in floating storage to the market, posing a modest downside risk for oil prices while increasing demand from Iran for UAE goods and services.

### Trade and exports with Iran
- Exports to Iran in 2013: US$12 billion, accounting for 12 percent of the UAE’s total nonoil exports.
- Iran was the UAE’s most important export destination after India in 2013.
- Exports to Iran consist largely of re-exported goods that cycle through the UAE’s port infrastructure.
- After growing steadily for several years, exports leveled off and declined with the intensification of sanctions and enforcement efforts since 2010-11.
- The UAE is well positioned to serve as a transshipment point for renewed trade activity if the Iran market opens.

### Simulation results and macroeconomic impact
- Results from a simulation model suggest that a reversal of sanctions could add 1 percentage point to real GDP growth over 2016-18 through higher nonhydrocarbon exports alone.
- Model assumptions and caveats:
  - The model assumes trade with Iran would gradually return to levels consistent with trends prior to the current sanctions regime.
  - About one-quarter of the gap between trade under the scenario of continued sanctions and the trend is assumed to be permanently lost.
  - Data from the National Bureau of Statistics (NBS) are used but may not be comprehensive.
  - Alternative sources show different estimates for UAE-Iran trade (for example, Dubai Chamber data show a larger decline in exports to Iran over 2011-13).
  - The trade loss from sanctions may thus be underestimated in this context.

### Services, tourism, and indirect effects
- An agreement would boost demand from Iran for UAE services exports such as trade finance, transportation, tourism, and hospitality.
- Dubai hotel guests arriving from Iran have dropped by almost half since 2010, used as a proxy for recent business and tourism activity.
- If sanctions are lifted, the additional indirect impact of spending by tourists and business travelers in the broader economy could be significant.

*Source: Box 2. The Economic Impact of the Removal of Iran Sanctions, _cr15219 - Box 2. The Economic Impact of the Removal of Iran Sanctions_*

### 17. In the medium term under an improved supervisory framework, safety nets and

### _cr15219 - 17. In the medium term under an improved supervisory framework, safety nets and

### Strengthening bank resolution and safety nets
- Develop the bank resolution framework in line with the Key Attributes of Effective Resolution Regimes for Financial Institutions.
- Strengthen resolution powers of the central bank by designating it as the lead resolution authority for banks and their subsidiaries and equipping it with robust tools.
- Establish a deposit insurance scheme as part of the resolution framework; authorities are studying other countries’ experience.

### Islamic finance and financial stability implications
- Rapid growth of Islamic banking has increased its share in total assets to 17 percent and in deposits to 19 percent (Annex V).
- Regulatory and supervisory frameworks should be tailored to address Islamic banks’ specific risks, including profit-sharing investment accounts and Shari'ah governance.
- Continue developing Shari'ah-compliant liquidity management instruments to enable robust liquidity management for Islamic banks.
- Authorities note current frameworks do not differentiate between Islamic and conventional banks, but a review to address Islamic banks’ specificities is ongoing.

### Macroprudential measures and real estate market risks
- Maximum loan-to-value ratios (LTV) for mortgages and debt-service-to-income limits (DSTI) have helped limit systemic risk from real estate price speculation and should remain in place while the market stabilizes.
- Central bank plans:
  - Introduce capital and liquidity macroprudential tools.
  - Publish a financial stability report on a regular basis.
- Current gap: no formalized macroprudential policy framework.
- Recommended elements of an improved framework:
  - Review of the central bank law to formalize a financial stability mandate and cement the use of a broad range of macroprudential instruments (including the Basel III counter-cyclical buffer).
  - Establishment of a Financial Stability Committee at the central bank level.
  - Institutionalize coordination with the Ministry of Finance and other relevant agencies.

### Government-related entities (GREs) and macro-financial vulnerabilities
- Some GREs are highly indebted; proactive management of upcoming debt repayments is important, including timely communication to guide market expectations.
- GREs have been proactive in managing debt repayments; listed GREs disclose financials in annual reports.
- Recommendations to reduce risks:
  - Improve GRE risk management, reporting, and governance.
  - Avoid transfer of maturing GRE debt to domestic banks to preserve banking sector stability; raising risk-weights on GRE lending could make such transfers costly to banks.
  - Dubai government should collect and publish information on Dubai GRE debt (staff recommendation).

### Developing domestic debt markets and related reforms
- Benefits: reduce reliance on external funding and bank lending for the government, GREs, and private companies; provide instruments for banks’ liquidity management under Basel III liquidity rules.
- Encouraged actions:
  - Pass the draft Public Debt Law to allow the central government to issue debt and provide a benchmark yield curve for the private sector.
  - Step up securities issuance by Emirates’ governments to deepen the domestic market.
  - Adopt a trust law to facilitate Sukuk issuance.
- Authorities plan to push ahead with developing the domestic debt market and to establish a benchmark yield curve.

### Strengthening AML/CFT framework
- Recent revision of the AML/CFT Law and approval of executive by-laws are welcome.
- Authorities should:
  - Bring forward their plan to conduct a national risk assessment.
  - Continue strengthening risk-based supervision of financial and nonfinancial businesses and professions, ensuring preventive measures commensurate with risks (including identification of beneficial owners and reporting of suspicious transactions).
  - Seek better understanding of the origins and intended use of financial flows.
  - Enhance dialogue with foreign regulators and other stakeholders to help prevent de-risking by correspondent banks that could divert remittances to informal channels and adversely impact financial inclusion.

### Further diversifying sources of inclusive growth
- UAE performs well on competitiveness indicators but can improve labor market efficiency.
- New law on FDI under drafting would allow 100 percent foreign ownership for specific sectors outside free zones as defined by the government.
- Recommended structural reforms:
  - Strengthen business environment (enforcing contracts, resolving insolvency).
  - Transition toward a knowledge-driven economy through better quality education, promotion of innovation and new technologies.
  - Implement labor market reforms to incentivize private sector employment of nationals, reduce attractiveness of public-sector employment, improve skills-jobs match, and promote entrepreneurship.
  - Improve labor market statistics for accurate assessment and policy design.
- Enhancing SME access to credit:
  - Progress: new law on SMEs, establishment of credit bureau and credit registry, public funds to facilitate SME access, financial literacy, and business incubation.
  - Further actions: strengthen credit assessment tools and creditors’ rights (adopt insolvency law); separate development and financing functions in public spending; focus public support on seed money or guarantees for startups/SMEs.

### Staff appraisal — macro-financial assessment and policy recommendations
- Macro risks:
  - Lower oil prices have increased macro-financial stability risks.
  - Prudent policies, diversification, and UAE’s safe-haven status have built large fiscal and external buffers and resilience.
  - Implementation of megaprojects and private investment in the run-up to Expo 2020 expected to support activity over the medium term.
  - Risks: erosion of fiscal and external surpluses from lower oil prices; a hike in the US interest rate could tighten financial conditions; risks exacerbated by high stock market volatility, high NPLs, and low banking system liquidity if government and GREs withdraw deposits.
- Macroeconomic policy mix:
  - Focus on gradual fiscal consolidation while maintaining the peg and easing liquidity management if needed.
  - Authorities’ plan to consolidate the fiscal position is appropriate; pace should consider fiscal buffers and broad economic impact.
  - Monetary policy framework aiming to maintain the peg while strengthening liquidity management and deepening money markets is appropriate.
  - In an adverse scenario with a decline in deposits, liquidity management could be eased to support credit growth; government deficit financing should avoid tightening banking system liquidity.
- Fiscal consolidation guidance:
  - Rationalize spending while preserving government investments relative to nonhydrocarbon GDP to support infrastructure.
  - Implement GRE megaprojects gradually, aligned with expected demand.
  - Control public sector wage bill growth; reduce energy subsidies and capital/other transfers.
  - Consider raising more nonhydrocarbon revenues through new tax measures.
  - Strengthen annual budget processes, Public Finance Management Systems, and operationalize medium-term budget frameworks.
  - Maintain close oversight and strengthen debt management frameworks.
- Banking regulation and supervision:
  - Plans by the CBU to strengthen the banking regulatory and supervisory framework and hold banks accountable with no exemptions are welcome.
  - CBU plans to phase in Basel III capital and liquidity standards over 2015-19 and to strengthen risk-based supervision; timely implementation is recommended.
  - Monitor compliance with loan concentration limits for GREs and local governments; transition paths for banks exceeding limits should have no exemptions.
  - Developing domestic debt markets would help banks comply with loan concentration limits.
  - Over the medium term, consider developing resolution frameworks and establishing deposit insurance mechanisms; continue efforts to strengthen AML/CFT framework.
- Macroprudential framework:
  - Build on successful real estate-specific measures (maximum LTVs and DSTI limits).
  - Strengthen framework in line with best practices: formalize financial stability mandate in central bank law; establish Financial Stability Committee; institutionalize coordination with Ministry of Finance and other relevant agencies.
  - Continue strengthening GRE balance sheets and actively manage upcoming GRE debt repayments; raise risk-weights of bank lending to GREs if needed.
- Structural reforms and statistics:
  - Structural reforms should aim to diversify the economy and accelerate private sector-led job creation for nationals (open FDI, improve business environment, knowledge economy, ease SME finance, create incentives for entrepreneurship).
  - Build on progress in improving statistics: implement inter-agency project to compile the International Investment Position to close statistical gaps on foreign assets and debt; provide adequate resources to improve balance of payments statistics.
  - Develop more comprehensive demographic and labor market statistics and disseminate complete data on Dubai GRE debt.

*Source: UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND*

### 32. It is recommended that the next Article IV consultation take place on the standard 12-

### _cr15219 - 32. It is recommended that the next Article IV consultation take place on the standard 12-

### Real Sector Developments
- Traffic at Dubai International Airport, 2009–April 2015 (Thousands, 3‑month moving average): chart shows passengers per month and cargo (tons per month, RHS) for Jan-09 to Jan-15; note 1/ Because of reconstruction activities at the airport, passengers and cargo turnover declined in May-July 2014.
- "Growth in the manufacturing sector has moderated in recent month..."
- "…while the transportation sector continued to expand following the temporary slowdown last year 1/."
- "Hydrocarbon growth picked up and nonoil growth remained strong in 2014..."
- Contributions to CPI Inflation, 2009−May 2015 (Y-o-y, percent change): Non-Housing and Housing components plotted for Jan-09 to Jan-15; "Inflation is picking up moderately, driven by a lagged response from rising rents..."
- Real GDP Growth, 2004−14 (Annual percent change): series for Real GDP, Real Non-oil GDP, Real oil GDP plotted 2004–2014; "…which have recently declined slightly along with sales prices."
- Residential Real Estate Sales and Rental Price Index, 2009−March 2015 (Index, Dec. 2008=100): Sales prices (Dubai, Abu Dhabi) and Rental prices (Dubai, Abu Dhabi) plotted Jan-09 to Jan-15.
- Contributions to Non-oil Real Growth, 2013–14 (Percent): Industry, Trade, Services contributions shown; "…driven mostly by industry and services."
- Purchasing Managers' Index, July 2012−June 2015 (Index): series Jul-12 to Jun-15; contraction/expansion threshold indicated.

### Fiscal Developments
- "The fiscal position deteriorated in 2014..."
- "…Due to high government expense in Abu Dhabi..."
- "…And elevated government expense in Dubai..."
- Fiscal components shown in charts for 2004–2014: General Government Revenue (Percent of GDP) split Hydrocarbon 3/ and Non-hydrocarbon 4/; Oil price (RHS).
- General Government Expenditure (Percent of GDP) components (Net acquisition of nonfinancial assets; Compensation of employees; Subsidies/grants/social benefits; Capital transfers 5/; Other expense) shown 2004–2014.
- Abu Dhabi Government Expenditure (Percent of Abu Dhabi GDP) and Dubai Government Expenditure (Percent of Dubai GDP) charts, 2004–2014, decomposition by spending type.
- Fiscal Stance, 2004–14: Overall fiscal bal. (% GDP); Adjusted non-oil primary bal. (% non-oil GDP) 1/; Structural fiscal balance (5,1,3),% of GDP 2/ plotted 2004–2014.
- Fiscal Break-even Oil Prices, 2013–20 (U.S. dollars per barrel) and 2008–16 (U.S. dollars per barrel) charts: "Raising the 2014 fiscal break-even oil price, which is expected to decline with the planned fiscal consolidation."
- Notes: 1/ Excludes staff estimates on SWF returns (investment income). 2/ A 9-year moving average of hydrocarbon prices (prices of the past five years and projected prices for the current and the next three years). 3/ Includes staff estimates on profit transfers from the national oil company to SWF. 4/ Includes staff estimates on SWF returns (investment income). 5/ Abu Dhabi loans and equity to finance development projects.

### Monetary and Financial Developments
- "Monetary conditions remain accommodative, with a stable spread to the U.S. policy rate."
- Policy Rates, 2007–May 2015 (Percent): U.S. Fed Funds Rate, CBU Policy Rate, Interbank Rate (1-week) plotted Dec-07 to Jan-15.
- Bank Liquidity, 2008–May 2015 (Billions of Dirham): Foreign Assets; CDs held by banks; Banks' deposits with CBU; Loan to deposit ratio (RHS) series Dec-08 to Dec-14.
- Stock Market Indices, 2006–June 2015 (Index, Dec. 31, 2005=100): MSCI EM, Dubai, Abu Dhabi plotted Dec-05 onward; "As other regional markets, UAE equity markets declined along with oil prices."
- GCC: CDS Spreads, 2008–June 2015 (Basis points): Dubai, Abu Dhabi, GCC series Mar-08 to Sep-14; "CDS spreads continued to be stable despite the oil price decline."
- Debt Issuance by Borrower Type, 2003–14 (US$ billions): series showing General government, Private sector bank, Public sector bank, Other public sector, Other private sector; "Debt issuance has remained stable since 2011, with the private sector increasingly issuing debt."
- Bank Deposits, 2009–May 2015 (Y-on-y, percent change): Overall deposits; Deposit of residents; Deposit of non-residents; Government deposits plotted Dec-09 to May-15; "Resident deposits drove deposit growth in 2014." "Banking sector liquidity continues to be comfortable."

### External Sector Developments
- "The current account surplus is declining amid lower oil prices."
- Current Account Balance (Percent of GDP) and Avg. Oil Price (RHS) plotted 2004–2014.
- "And the real effective exchange rate has appreciated."
- Real Effective Exchange Rate (Index; 2005=100): UAE: REER; UAE: Import-Based REER; GCC: Import-Based REER plotted 2003–2015.
- "Non-oil external deficits remain large."
- Balance on Non-Oil Goods and Services (Percent of GDP) 2004–2014 plotted.
- Non-Oil Exports: Top 10 Partners, 2007-13 (Share of Total Non-Oil Exports): China, Hong Kong, Egypt, Kuwait, Singapore, Oman, Switzerland, Saudi Arabia, Turkey, India, Rest of World shares displayed.
- Hydrocarbon Production, Consumption, and Exports (Millions of barrels per day), 2000–2014: Production, Exports, Consumption series show "Hydrocarbon exports are flattening as domestic consumption grows, despite robust production."
- Foreign Direct Investment: FDI Inflows, FDI Abroad, Net FDI (US $ billions) plotted 2004–2014; "Foreign direct investment has increased steadily."

### Business Environment and Governance Indicators
- Global Competitiveness Index Ranks by Category, 2014-15 (Rank out of 144): UAE ranks listed across categories with ranks: Market size 46; Health and primary education 38; Technological readiness 24; Innovation 24; Financial market development 17; Business sophistication 14; Total 12; Labor market efficiency 8; Institutions 7; Higher education and training 6; Macroeconomic environment 5; Infrastructure 3; Goods market efficiency 3.
- "UAE ranks favorably on a number of governance and competitiveness indicators, but there is scope for improvement."
- Policy-relevant findings: "Further progress in contract enforcement, resolving insolvency, and strengthening legal rights of lenders while improving coverage of and access to credit information would be particularly helpful."
- World Governance Indicators, 2013 (0=minimum, 100=maximum): Voice & Accountability; Political Stability, No Violence; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption plotted for UAE, GCC, Singapore, UAE oil exporters, EM, LIC, World.
- World Bank Doing Business, 2014 (Rank out of 189): UAE vs Advanced Economies, GCC, World across indicators: Starting a Business 1/; Dealing with Construction Permits; Getting Electricity; Registering Property; Credit Rights and Information 2/; Protecting Investors 3/; Paying Taxes; Trading Across Borders; Enforcing Contracts 4/; Resolving Insolvency.
- Education and labor: "Quality in education and efficiency of labor markets need to be improved." TIMSS and PISA scores plotted; Labor Market Efficiency and Young Population Ratio plotted (Population ratio for those of 14 years or younger).

### Selected Macroeconomic Indicators (Table 2, 2012–20)
- Hydrocarbon sector
  - Exports of oil, oil products, and gas (in billions of U.S. dollars): 126.4; 129.4; 111.6; 70.0; 78.2; 83.3; 88.1; 92.0; 95.2 (2012–2020 row values).
  - Average crude oil export price (in U.S. dollar per barrel): 112.0; 110.0; 98.9; 51.5; 67.2; 70.0; 72.5; 74.1; 75.0.
  - Crude oil production (in millions of barrels per day): 2.7; 2.8; 2.8; 2.9; 2.9; 3.0; 3.1; 3.1; 3.2.
- Output and prices
  - Nominal GDP (in billions of UAE dirhams): 1,371; 1,422; 1,467; 1,297; 1,402; 1,487; 1,583; 1,685; 1,809.
  - Nominal GDP (in billions of U.S. dollars): 373; 387; 399; 353; 382; 405; 431; 459; 493.
  - Real GDP (annual percent change): 7.2; 4.3; 4.6; 3.0; 3.1; 3.3; 3.5; 3.6; 3.8.
  - CPI inflation (average): 0.7; 1.1; 2.3; 3.8; 3.0; 2.6; 2.8; 3.0; 3.3.
- Investment and saving
  - Gross domestic investment (% of GDP): 23.1; 23.2; 24.7; 22.2; 22.0; 22.8; 23.2; 24.3; 25.5.
  - Gross national saving (% of GDP): 44.5; 41.6; 38.3; 27.2; 27.9; 29.0; 29.7; 30.9; 32.3.
- Public finances
  - Revenue (% of GDP): 40.1; 41.0; 37.8; 22.6; 32.1; 31.8; 32.2; 32.0; 31.0.
  - Expenditures (% of GDP): 29.2; 30.6; 32.8; 35.5; 31.9; 30.3; 28.8; 27.4; 26.0.
  - Net lending(+)/borrowing(-) (Revenue minus expenditures) (% of GDP): 10.9; 10.4; 5.0; -2.9; 0.2; 1.5; 3.4; 4.6; 5.1.
  - Adjusted non-hydrocarbon primary balance 3/ (percent of nonhydrocarbon GDP): -36.2; -35.4; -36.7; -34.0; -30.2; -28.5; -26.8; -25.2; -23.4.
  - Gross general government debt (percent of GDP): 21.9; 16.4; 14.3; 16.4; 15.2; 14.2; 13.2; 12.4; 11.8.
- Monetary sector (annual percent change unless otherwise indicated)
  - Net foreign assets (billions dirham): 74.0; 53.0; 16.2; 3.1; 5.2; 4.5; 4.7; 5.9; 5.9.
  - Credit to private sector (annual percent change): 1.6; 3.5; 11.5; 7.2; 8.8; 9.4; 10.6; 11.7; 12.6.
  - Broad money (annual percent change): 4.4; 22.5; 8.0; 6.8; 10.2; 9.8; 10.6; 10.8; 10.9.
- External sector (billions of U.S. dollars unless otherwise indicated)
  - Exports and re-exports of goods: 360; 374; 371; 339; 361; 385; 414; 445; 485.
  - Imports of goods: 218; 230; 240; 248; 263; 281; 303; 328; 361.
  - Current account balance (billions of U.S. dollars): 79.6; 71.4; 54.6; 17.6; 22.6; 25.4; 28.0; 30.5; 33.4.
  - Current account balance (in percent of GDP): 21.3; 18.4; 13.8; 4.1; 5.0; 5.9; 6.3; 6.5; 6.8.
  - Gross official reserves 5/ (billions of U.S. dollars): 47.1; 68.2; 78.5; 76.8; 83.7; 91.2; 99.1; 108.5; 118.4.
- Memorandum items: Local currency per U.S. dollar (period average) 3.673 for 2012–2014; Nominal effective exchange rate (2010 = 100): 101.5; 106.1; 110.7; Real effective exchange rate (2010 = 100): 93.5; 93.7; 96.8.
- Notes: 1/ Includes staff estimates on profit transfers from the national oil company to SWF and SWF returns (investment income). 2/ Includes loans and equity to finance development projects. 3/ In percent of nonhydrocarbon GDP. Excludes staff estimates on SWF investment income. 4/ As a result of changes in economic sector classifications in bank report forms during 2013, readings for annual percent changes for broad money and private sector credit for 2013 are inaccurate. The central bank estimates that private sector credit growth was around 8.2 percent in 2013. 5/ Excludes staff estimates on foreign assets of sovereign wealth funds.

### Balance of Payments (Table 3, 2012–20) — selected lines (Billions of U.S. dollars)
- Current account balance: 79.6; 71.4; 54.6; 17.6; 22.6; 25.4; 28.0; 30.5; 33.4 (2012–2020).
- Trade balance: 141.7; 144.2; 130.9; 90.6; 98.3; 104.2; 111.0; 117.6; 124.0.
- Exports (total): 359.7; 374.2; 370.7; 338.8; 361.1; 385.4; 413.9; 445.2; 484.8.
  - Oil and oil products: 112.7; 116.4; 98.9; 61.9; 69.2; 73.8; 78.1; 81.6; 84.5.
  - Nonhydrocarbon: 100.0; 104.1; 112.4; 117.0; 122.1; 130.0; 140.5; 152.8; 168.9.
  - Re-exports: 133.4; 140.7; 146.7; 151.9; 160.8; 172.0; 185.3; 200.4; 220.7.
- Imports (f.o.b.): -218.0; -230.0; -239.8; -248.2; -262.8; -281.2; -302.9; -327.6; -360.8.
- Services, net: -47.2; -49.3; -50.8; -51.5; -54.4; -57.4; -61.1; -65.3; -71.3.
- Transfers, net: -15.2; -23.7; -25.7; -23.7; -23.7; -24.4; -25.6; -27.4; -29.8.
- Financial account balance: -45.9; -49.5; -52.4; -19.3; -15.7; -17.9; -20.1; -21.1; -23.6.
- Overall balance: 10.0; 19.9; 9.3; -1.7; 6.9; 7.5; 7.9; 9.4; 9.9.
- Change in central bank reserves: -10.0; -19.9; -9.3; 1.7; -6.9; -7.5; -7.9; -9.4; -9.9.
- Memorandum: GDP (billions of U.S. dollars): 373.4; 387.2; 399.5; 353.2; 381.7; 404.9; 431.0; 458.8; 492.6. Gross reserves of central bank (billions of U.S. dollars): 47.1; 68.2; 78.5; 76.8; 83.7; 91.2; 99.1; 108.5; 118.4.

### Consolidated General Government Finances (Table 4a, 2012–20) — selected lines
- Total revenue (billions of UAE dirhams): 550.0; 582.8; 553.9; 422.2; 449.4; 473.0; 509.0; 538.8; 561.4.
- Expenditures (a+b): 400.9; 434.5; 480.8; 460.1; 446.6; 450.7; 455.9; 462.2; 470.1.
- Net lending(+)/borrowing(-) (Revenue minus expenditures): 149.1; 148.4; 73.1; -37.8; 2.9; 22.3; 53.1; 76.7; 91.4.
- Hydrocarbon revenue (memorandum, billions dirham): 396.3; 401.7; 351.9; 221.9; 249.8; 266.7; 282.9; 295.7; 306.1.
- Fiscal break-even oil price (US$ per barrel): 69.9; 69.4; 78.4; 72.0; 66.5; 64.2; 58.9; 54.8; 52.6.

### Central Government, Abu Dhabi, Dubai Finances (Tables 4b–4d) — selected highlights
- Central Government (Table 4b) total revenue (billions dirham): 61.2; 62.6; 61.8; 62.8; 64.5; 66.0; 67.8; 69.9; 72.3. Net lending(+)/borrowing(-): -2.6; 3.3; -0.9; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0.
- Abu Dhabi Government (Table 4c) total revenue (billions dirham): 457.7; 473.8; 436.2; 311.4; 335.1; 355.5; 388.0; 413.9; 431.7. Net lending(+)/borrowing(-): 161.5; 138.1; 66.4; -38.0; 2.6; 21.9; 52.6; 76.1; 90.7.
- Dubai Government (Table 4d) total revenue (billions dirham): 39.6; 55.7; 59.1; 51.2; 53.0; 54.7; 56.4; 58.3; 60.5. Net lending(+)/borrowing(-): -9.6; 7.6; 7.6; 0.0; 0.1; 0.3; 0.4; 0.5; 0.6.

### Monetary Survey (Table 5, 2012–20) — selected lines (Billions of UAE dirhams)
- Net foreign assets: 161; 246; 286; 295; 310; 324; 339; 359; 380.
  - Central Bank foreign assets: 173; 251; 288; 282; 307; 335; 364; 399; 435.
  - Commercial banks foreign assets: 307; 412; 497; 547; 553; 555; 558; 561; 564.
- Net domestic assets: 702; 811; 855; 924; 1,033; 1,151; 1,292; 1,448; 1,624.
- Claims on private sector: 833; 861; 960; 1,029; 1,119; 1,225; 1,355; 1,513; 1,704.
- Broad money (M2): 862; 1,057; 1,141; 1,218; 1,343; 1,474; 1,631; 1,807; 2,005.
- Foreign currency deposits / total deposits (in percent): 17.1; 19.5; 20.1; 19.8; 19.8; 19.8; 19.8; 19.8; 19.8.
- NFA/ M2 (in percent): 18.6; 23.3; 25.0; 24.2; 23.1; 22.0; 20.8; 19.9; 19.0.

### Debt Maturities — Selected Tables (2015–20)
- Dubai: Maturing Bonds and Syndicated Loans (Table 6a) — Total Dubai Debt (2015–20, beyond, total): Total Dubai Debt rows show high maturities with Total Dubai Debt for 2015–20 = 69,020 (US$ millions) and Beyond = 37,780; Total = 29,047; Grand total 135,847 (US$ millions) across categories and issuers.
- Abu Dhabi: Maturing Bonds, Syndicated and Bilateral Loans (Table 6b) — Total Abu Dhabi debt (2015–20 = 35,406; Beyond = 14,351; Total = 49,757 US$ millions). Total Abu Dhabi debt, including banks = 45,128 (2015–20) ; Beyond = 16,068; Total = 61,196 US$ millions.
- Memoranda and issuer breakdowns provided for Government of Dubai, Dubai World and subsidiaries, Investment Corporation of Dubai, Government of Abu Dhabi, International Petroleum Investment Company, Mubadala Development Company, Etihad Airways, Etihad Rail, Abu Dhabi Water & Electricity Authority, banks, and other GREs.

*United Arab Emirates: IMF staff report content as provided in the supplied document.*

### Annex I. United Arab Emirates: Long-term Fiscal Sustainability Analysis

### Annex I. United Arab Emirates: Long-term Fiscal Sustainability Analysis

### Long-term sustainability framework and baseline assumptions
- Long-term sustainability assumes intergenerational equity by calculating a constant real per capita government spending path (and related nonhydrocarbon deficit) that delivers a constant real per capita annuity to finance government spending after hydrocarbon revenues are exhausted.
- Projections until 2020 are based on staff’s macroframework, including the WEO assumptions about the oil price.
- After 2020, the baseline scenario assumes:
  - flat hydrocarbon production,
  - annual oil price growth of 2 percent,
  - inflation growth of 2 percent,
  - population growth of 1.5 percent,
  - real return on assets of 4 percent.

### Main finding: annuity gap and timeline to intergenerational equity
- Under conservative baseline assumptions the government does not save its exhaustible oil revenue sufficiently for future generations, but favorable persistent shocks could imply a smaller gap.
- The gap between the projected deficits and the deficits consistent with a constant real per capita annuity is 11 percent of nonhydrocarbon GDP in 2014.
- With fiscal consolidation assumed in the baseline, the gap is projected to almost disappear by 2020.
- If beyond the forecast period, consolidation continues in the same pace as envisaged for 2020 under the baseline, the fiscal stance would be fully consistent with intergenerational equity by 2022.
- An alternative annuity approach (the constant real annuity rule) would imply a negative gap of 9 percent of nonhydrocarbon GDP in 2020.
- Both types of annuities are used in the literature.

### Alternative scenarios considered
- (i) lower population growth by 0.5 percentage point;
- (ii) lower real return on assets by 1 percentage point;
- (iii) lower oil price by $10 in 2015–20 and to remain constant thereafter;
- (iv) higher oil price by $10 in 2015-20 and to increase by 2 percent per annum in nominal terms thereafter.

*Source: IMF staff calculations.*

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### Annex II. United Arab Emirates: Debt Sustainability Analysis

### UAE Government DSA — Baseline indicators (selected, percent of GDP unless otherwise indicated)
- Nominal gross government debt: 17.4 (2013); 16.4 (2014); 14.3 (2015); 16.4 (2016); 15.2 (2017); 14.2 (2018); 13.2 (2019); 12.4 (2020); 11.8 (projection column headings imply continuation).
- Government gross financing needs: -10.8 (2013); -8.6 (2014); -2.1 (2015); 4.9 (2016); 1.8 (2017); 0.6 (2018); 2.8 (2019); -2.6 (2020); -3.5 (later column).
- Real GDP growth (in percent): 4.3 (2013); 4.3 (2014); 4.6 (2015); 3.0 (2016); 3.1 (2017); 3.3 (2018); 3.5 (2019); 3.6 (2020); 3.8 (further).
- Inflation (GDP deflator, in percent): 7.8 (2013); -0.6 (2014); -1.3 (2015); -1.4 (2016); 4.8 (2017); 2.7 (2018); 2.9 (2019); 2.7 (2020); 3.4 (later).
- Nominal GDP growth (in percent): 13.8 (2013); 3.7 (2014); 3.2 (2015); -11.6 (2016); 8.1 (2017); 6.1 (2018); 6.4 (2019); 6.5 (2020); 7.3 (later).
- Effective interest rate (in percent): 7.7 (2013); 4.5 (2014); 5.2 (2015); 4.9 (2016); 5.7 (2017); 6.0 (2018); 5.2 (2019); 6.5 (2020); 6.7 (later).

### Contribution to changes in public debt (selected)
- Change in gross government sector debt (cumulative): 1.6 (2013); -5.6 (2014); -2.0 (2015); 2.1 (2016); -1.2 (2017); -0.9 (2018); -1.0 (2019); -0.8 (2020); -0.6; cumulative -2.5.
- Identified debt-creating flows: -13.8 (2013); -11.2 (2014); -5.5 (2015); 4.8 (2016); -1.5 (2017); -2.4 (2018); -4.4 (2019); -5.4 (2020); -5.9; cumulative -14.7.
- Primary deficit: -13.4 (2013); -11.4 (2014); -5.8 (2015); 2.1 (2016); -1.1 (2017); -2.4 (2018); -4.2 (2019); -5.4 (2020); -5.8; cumulative -16.8.
- Primary (noninterest) revenue and grants: 36.5 (2013); 41.0 (2014); 37.8 (2015); 32.6 (2016); 32.1 (2017); 31.8 (2018); 32.2 (2019); 32.0 (2020); 31.0; cumulative 191.6.
- Primary (noninterest) expenditure: 23.0 (2013); 29.6 (2014); 32.0 (2015); 34.7 (2016); 31.0 (2017); 29.4 (2018); 27.9 (2019); 26.6 (2020); 25.2; cumulative 174.8.
- Automatic debt dynamics: -0.3 (2013); 0.2 (2014); 0.3 (2015); 2.7 (2016); -0.4 (2017); 0.0 (2018); -0.2 (2019); 0.0 (2020); -0.1; cumulative 2.1.
  - Real interest rate contribution: 0.1 (2013); 1.1 (2014); 1.0 (2015); 3.2 (2016); 0.1 (2017); 0.5 (2018); 0.3 (2019); 0.5 (2020); 0.4; cumulative 4.9.
  - Real GDP growth contribution: -0.5 (2013); -0.9 (2014); -0.7 (2015); -0.5 (2016); -0.5 (2017); -0.5 (2018); -0.5 (2019); -0.5 (2020); -0.4; cumulative -2.8.
- Residual, including asset changes: 15.4 (2013); 5.7 (2014); 3.4 (2015); -2.7 (2016); 0.2 (2017); 1.5 (2018); 3.4 (2019); 4.6 (2020); 5.3; cumulative 12.2.

### Composition of government debt (by maturity and currency)
- Charts indicate by maturity: medium and long-term vs short-term shares (percent of GDP) for 2004–2020 projection.
- Charts indicate by currency: local currency-denominated vs foreign currency-denominated shares (percent of GDP) for 2004–2020 projection.
- Gross nominal government debt (percent of GDP) and government gross financing needs (percent of GDP) depicted for 2013–2020 with projection lines.

### Alternative scenario outcomes (summary)
- Oil price shock (lower by $10 in 2016-20):
  - Primary Balance path: -2.1 (2015); -1.7 (2016); -0.3 (2017); 1.7 (2018); 2.9 (2019); 3.5 (2020).
  - Effective interest rate: 4.9 (2015); 5.7 (2016); 5.7 (2017); 5.7 (2018); 6.2 (2019); 6.1 (2020).
  - Outcome: illustrative drop in oil prices by $10 a barrel would put the gross debt ratio on an upward path; the primary balance would deteriorate to 3.5 percent of GDP in 2020, with government debt rising to 24 percent of GDP.
- GRE contingent liability scenario (20 percent of GRE debt taken over by government in 2016-20):
  - Primary Balance path: -2.1 (2015); -0.5 (2016); 0.9 (2017); 2.9 (2018); 4.2 (2019); 4.8 (2020).
  - Effective interest rate: 4.9 (2015); 5.7 (2016); 5.8 (2017); 5.0 (2018); 6.3 (2019); 6.3 (2020).
  - Outcome: primary balance deteriorates to 4.8 percent of GDP in 2020, with government debt increasing to 18 percent of GDP.
- Combined scenario (oil price shock + GRE contingent liability):
  - Primary Balance path: -2.1 (2015); -3.3 (2016); -1.8 (2017); 0.4 (2018); 1.7 (2019); 2.4 (2020).
  - Effective interest rate: 4.9 (2015); 5.7 (2016); 5.5 (2017); 4.7 (2018); 6.1 (2019); 5.9 (2020).
  - Outcome: primary balance would deteriorate to 2.4 percent of GDP in 2020, with debt rising to 31 percent of GDP.

*Source: IMF staff.*

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### Dubai Government Debt Sustainability

### Baseline and shock scenarios (selected)
- Baseline government debt (percent of Dubai GDP): 37.0 (2012); 34.5 (2013); 31.3 (2014); 29.9 (2015); 27.6 (2016); 25.5 (2017); 23.0 (2018); 22.3 (2019); 20.9 (2020); debt-stabilizing primary balance -0.7.
- Alternative scenarios:
  - A1. Real GDP growth shock:
    - Debt path: 31.1 (2012); 29.6 (2013); 28.4 (2014); 26.9 (2015); 27.3 (2016); 27.0 (2017); debt-stabilizing primary balance -0.5.
    - Real GDP growth is at baseline minus 3/4 standard deviation in 2015, 1/2 standard deviation in 2016 and 1/4 standard deviation thereafter.
  - A2. Global downturn scenario:
    - Debt path: 32.2 (2012); 31.8 (2013); 31.5 (2014); 30.7 (2015); 31.7 (2016); 31.8 (2017); debt-stabilizing primary balance -0.1.
    - Scenario combines real GDP growth shock and 1/4 standard deviation shocks to real interest rate and 1/2 standard deviation shocks to primary balance in 2015–20.
  - A3. Real estate shock with global slowdown:
    - Debt path: 35.7 (2012); 39.0 (2013); 42.6 (2014); 45.7 (2015); 50.6 (2016); 54.2 (2017); debt-stabilizing primary balance 3.4.
    - Under the global downturn scenario, the government takes over 20 percent of total GREs debt in 2015-20.

### Key quantitative outcomes described
- A sharp decline in GDP growth in 2015 (by ¾ of standard deviation from the baseline) and a gradual recovery in 2016–20 would raise the debt-to-GDP ratio by about 6 percentage points in 2020 compared to the baseline.
- Under a severe global downturn scenario (real GDP shock, lower real interest rates, deterioration in primary balance), Dubai’s government debt would increase to about 32 percent of GDP in 2020.
- Combined global downturn with real estate shock (government takes over 20 percent of GREs’ total debt) would increase government debt-to-GDP ratio to about 54 percent in 2020.

*Source: UAE authorities; and IMF staff estimates and projections.*

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### External Debt Sustainability Framework (Table highlights, 2010–20; percent of GDP unless otherwise indicated)

### Baseline external debt and flows
- Baseline: External debt: 48.5 (2010); 39.7 (2011); 38.7 (2012); 44.6 (2013); 49.2 (2014); 58.8 (2015); 56.0 (2016); 54.4 (2017); 52.6 (2018); 50.9 (2019); 48.8 (2020).
- Change in external debt: -3.1 (2010); -8.7 (2011); -1.1 (2012); 6.0 (2013); 4.6 (2014); 9.6 (2015); -2.8 (2016); -1.7 (2017); -1.8 (2018); -1.7 (2019); -2.1 (2020).
- Identified external debt-creating flows (sum of lines 4+8+9): -10.0 (2010); -25.0 (2011); -24.7 (2012); -20.5 (2013); -16.3 (2014); -7.5 (2015); -8.6 (2016); -9.0 (2017); -9.3 (2018); -9.5 (2019); -9.7 (2020).
- Current account deficit, excluding interest payments: -4.2 (2010); -16.1 (2011); -22.7 (2012); -20.0 (2013); -15.3 (2014); -7.0 (2015); -8.3 (2016); -9.1 (2017); -9.8 (2018); -10.1 (2019); -10.1 (2020).
- Deficit in balance of goods and services: -6.5 (2010); -18.1 (2011); -25.3 (2012); -24.5 (2013); -20.0 (2014); -11.1 (2015); -11.5 (2016); -11.5 (2017); -11.6 (2018); -11.4 (2019); -10.7 (2020).
- Exports: 78.8 (2010); 90.6 (2011); 100.6 (2012); 101.3 (2013); 98.0 (2014); 101.9 (2015); 100.7 (2016); 101.5 (2017); 102.6 (2018); 103.8 (2019); 105.4 (2020).
- Imports: 72.2 (2010); 72.5 (2011); 75.3 (2012); 76.8 (2013); 77.9 (2014); 90.9 (2015); 89.2 (2016); 89.9 (2017); 91.0 (2018); 92.4 (2019); 94.7 (2020).
- Net non-debt creating capital inflows (negative): -1.6 (2010); -1.8 (2011); -0.6 (2012); -0.7 (2013); -1.3 (2014); -0.9 (2015); -1.0 (2016); -1.0 (2017); -1.0 (2018); -1.0 (2019); -1.1 (2020).
- Automatic debt dynamics: -4.2 (2010); -7.2 (2011); -1.3 (2012); 0.1 (2013); 0.3 (2014); 0.4 (2015); 0.6 (2016); 1.1 (2017); 1.5 (2018); 1.7 (2019); 1.5 (2020).

### External debt indicators and financing needs
- External debt-to-exports ratio (in percent): 61.5 (2010); 43.9 (2011); 38.4 (2012); 44.0 (2013); 50.2 (2014); 57.7 (2015); 55.7 (2016); 53.6 (2017); 51.3 (2018); 49.0 (2019); 46.3 (2020).
- Gross external financing need (in billions of US dollars): 64.2 (2010); 27.8 (2011); 1.9 (2012); 15.4 (2013); 35.6 (2014); 80.7 (2015); 79.6 (2016); 79.9 (2017); 80.5 (2018); 81.2 (2019); 81.7 (2020).
- Gross external financing need (in percent of GDP): 22.4 (2010); 8.0 (2011); 0.5 (2012); 4.0 (2013); 8.9 (2014); 22.8 (2015); 20.9 (2016); 19.7 (2017); 18.7 (2018); 17.7 (2019); 16.6 (2020).

### Key macro assumptions underlying baseline (selected)
- Real GDP growth (in percent): 1.6 (2010); 4.9 (2011); 7.2 (2012); 4.3 (2013); 4.6 (2014); 3.8 (2015); 3.9 (2016); 3.0 (2017); 3.1 (2018); 3.3 (2019); 3.5 (2020); 3.6 (later); 3.8 (further).
- GDP deflator in US dollars (change in percent): 11.0 (2010); 15.8 (2011); 0.2 (2012); -0.6 (2013); -1.3 (2014); 6.1 (2015); 10.0 (2016); -14.1 (2017); 4.8 (2018); 2.7 (2019); 2.9 (2020); 2.7; 3.4.
- Nominal external interest rate (in percent): 3.7 (2010); 3.5 (2011); 3.9 (2012); 4.1 (2013); 3.8 (2014); 6.4 (2015); 4.0 (2016); 3.6 (2017); 4.3 (2018); 5.4 (2019); 6.5 (2020); 7.1; 7.1.

*Source: IMF staff.*

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### External Debt Sustainability: Bound Tests and Shocks (figure summaries)
- Figures present external debt (percent of GDP) under baseline and various shock scenarios:
  - Interest rate shock: baseline 49; scenario average 54.
  - Historical scenario averages and baseline compared.
  - CA (current account) shock: baseline 49; scenario average 66.
  - Combined shock scenarios: baseline 49; scenario averages 65 and 75 (for combined and 30% depreciation respectively).
  - Real depreciation shock (one-time real depreciation of 30 percent occurs in 2015) shows scenario average 75 versus baseline 49.
  - Growth shock scenario: baseline 49; scenario average 57.
- Notes:
  - Shaded areas represent actual data.
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance for some tests.
  - Ten-year historical averages used for historical scenarios; historical averages calculated over the ten-year period and used to project five years ahead.
  - Gross financing need under baseline displayed on right scale in figure panels.

*Source: UAE desk data; and staff estimates and projections.*

### Annex III. United Arab Emirates: External Sector Assessment

### Annex III. United Arab Emirates: External Sector Assessment

### Assessment of the exchange rate peg
- Staff believes the peg to the U.S. dollar serves the UAE well.
- Adjustment of external imbalances should occur through fiscal consolidation rather than exchange rate devaluation because external imbalances in the UAE stem largely from the government sector.

### Current account, oil prices, and exchange rate dynamics
- The current account surplus declined to 14 percent of GDP in 2014, from 18 percent in 2013, due to lower oil prices.
- The current account is projected to decline further to about 6 percent of GDP on average in 2015-20.
- The dirham appreciated by 13 percent in Q1 2015 year-on-year in real effective terms, reflecting the real effective appreciation of the U.S. dollar.
- The terms of trade fell by 8 percent in 2014 and are projected to decline by 19 percent in 2015.

### Trade volumes and capital flows
- Non-oil trade volumes have so far been stable.
- Factors limiting exchange-rate effects on trade volumes: limited import substitution, hydrocarbon exports priced in U.S. dollars, and flexible use of foreign workers who are paid wages set internationally.
- Non-hydrocarbon exports as a share of non-hydrocarbon GDP have significantly increased over the past years.
- FDI annual inflows have been stable at about 4 percent of nonhydrocarbon GDP over recent years.
- International bond issuance stood at $19 billion in 2014, up 16 percent from 2013.
- Issuance accelerated strongly in 2015, reaching $8 billion year-to-date in April, representing a 65 percent year-over-year increase.
- Although international banks reduced exposures to non-bank borrowers in Q4 2014, total credit to the UAE’s non-bank sector increased by $1 billion in 2014.

### External sustainability (ES) approach — methodology and results
- The ES approach is based on the permanent income hypothesis model and is the preferred method for the UAE because a current account gap would reflect suboptimal saving of hydrocarbon revenues.
- The approach calculates the current account required for the net present value (NPV) of hydrocarbon and investment income to equal the NPV of imports net of nonhydrocarbon exports; to support intergenerational equity the economy would then choose a path for imports, and hence a current account norm, by accumulating net foreign assets at an appropriate pace.
- Results are sensitive to assumptions about oil prices, return on assets, and population growth.
- Baseline and scenario projections until 2020 are based on staff’s macroframework, including the WEO assumptions about the oil price. After 2020, baseline assumptions include:
  - flat hydrocarbon production,
  - annual oil price growth of 2 percent,
  - inflation of 2 percent,
  - population growth of 1.5 percent,
  - real return on assets of 4 percent.
- Alternative scenarios assume:
  - (i) lower population growth by 0.5 percentage point;
  - (ii) lower real return on assets by 1 percentage point;
  - (iii) lower oil price by $10 in 2015-20 and to remain constant thereafter;
  - (iv) higher oil price by $10 in 2015-20 and to increase by 2 percent annually thereafter.
- The implied current account norm estimated by the ES method for 2014 (based on the constant real per capita annuity) is slightly higher than the actual current account surplus of 14 percent of GDP.
- The model permits consumption smoothing during periods of oil price volatility; the norm declines to 6-8 percent of GDP in the medium term and is estimated to be slightly higher than the projected current account balance: the gap will be less than 2 percent in 2015–20.
- Under the constant real annuity rule, the implied norm is lower by 7 to 12 percent of GDP than the projected surplus in the medium term.

### Macro-balance (EBA-Lite) approach — methodology and results
- The macro-balance approach uses regression analysis for a broad cross-section of countries (EBA-Lite) to predict the equilibrium current account consistent with structural and policy variables.
- The model’s predicted value for 2014 is 9½ percent of GDP based on actual policies.
- Imposing fiscal policy consistent with intergenerational equity raises the norm by 3 percent, while allowing for 2014 estimates of global policy gaps reduces it by 1 percentage point, resulting in a norm of 11½ percent of GDP for 2014.
- For 2015, the norm—based on the optimal fiscal policy projected for 2020—declines to 8 percent of GDP, or 3 percentage points higher than the projected current account balance.
- Caveat: The EBA-Lite model may not accurately capture the features of undiversified hydrocarbon exporters (e.g., the need for intergenerational savings), despite inclusion of some hydrocarbon-related variables.

### External buffers and reserve adequacy
- Central bank reserves are projected at US$72 billion (2015 projection).
- Reserves cover:
  - 4 months of imports (net of re-exports),
  - 70 percent of short-term debt,
  - 21 percent of broad money.
- Combined with estimated assets in sovereign wealth funds (mandated to make resources available in case of need), buffers are well above the range recommended by the Fund’s reserve adequacy metric.

### Annex IV summary — Oil and macro-financial linkages: VAR analysis
- Hydrocarbon sector share: represents 40 percent of UAE GDP.
- Non-hydrocarbon output is heavily reliant on hydrocarbon revenues via current and capital spending; non-hydrocarbon industrial activities are energy intensive and resource related; services are heavily driven by government spending financed by hydrocarbon revenues.
- Bank credit is driven by government current and capital spending and hydrocarbon developments:
  - Fiscal spending on infrastructure and investment projects fuels bank credit to public sector entities or private contractors.
  - Bank credit for personal lending (including mortgage and consumer loans) is importantly driven by public sector wages because banks can deduct loan payments directly from government employees’ paychecks.
  - Public sector deposits are a cheap source of funding.
- A three-variable VAR (annual data 1993–2014, one lag) was estimated with dependent variables: oil price (Brent crude), non-hydrocarbon GDP (logged differences), and non-performing loans (NPLs, simple differences, percent of gross loans).
  - Small sample size and parsimonious specification may omit important transmission mechanisms.
  - Variables were ordered for Choleski identification: oil price (most exogenous), non-hydrocarbon GDP, then NPLs.

### VAR empirical findings
- Estimated elasticities and accumulated impulse responses (one-standard deviation shocks, accumulated) indicate:
  - On impact and after 3 years:
    - Non-oil GDP to oil price: 0.057* (on impact), -0.021 (after 3 years).
    - NPLs to oil price: -0.014* (on impact), -0.061* (after 3 years).
    - NPLs to non-oil GDP: -0.106* (on impact), -0.185* (after 3 years).
    - Non-oil GDP to NPLs: -2.990* (on impact), -1.760 (after 3 years).
  - *Statistically significant at 5 percent.
- Interpretation:
  - Lower oil prices reduce non-oil GDP (elasticity of 0.057 on impact) and increase NPLs (semi-elasticity of -0.014 on impact) over a year.
  - Negative feedback loops between NPLs and non-oil GDP can develop on impact.
  - After 3 years, the response of non-oil GDP to an increase in NPLs is not statistically significant, possibly due to UAE authorities’ interventions to strengthen the banking system.
  - The response of NPLs to non-oil growth intensifies after 3 years.

*International Monetary Fund staff estimates contained in Annex III and Annex IV of the UAE external sector assessment.*

### Annex V. United Arab Emirates: Islamic Finance—Growth and Challenges

### Annex V. United Arab Emirates: Islamic Finance—Growth and Challenges

### Overview and Key Statistics
- Islamic finance has grown rapidly in the UAE; Islamic assets have grown by about 13 percent annually for the past five years.
- The system is bank-dominated:
  - Islamic banks (IBs) assets reached 17 percent of the total banking sector assets (corresponding to US$107 billion) by end-2014.
  - IBs held 19 percent of total deposits and 18 percent of total financing by end-2014.
  - Two banks account for almost 65 percent of total Islamic assets and could be considered systemically important, with 5.3 percent and 5.1 percent of the total banking sector assets, respectively.
- Issuance of sukuk is on the rise; the outstanding amount reached US$5.4 billion as of end-2014.
- Institutional landscape (as noted): eight Islamic banks, 12 Islamic finance companies, an Islamic investment company, and 23 Islamic windows set up by conventional banks.

### Balance Sheet and Financial Soundness Indicators (2014)
- Aggregate totals (in millions of AED):
  - Total assets (Total): 2,304,869
  - Total assets (CBs): 1,912,948
  - Total assets (IBs): 391,921
- Relative size by assets:
  - CBs: 83.0
  - IBs: 17.0
- Key ratios and indicators (Total / CBs / IBs):
  - Equity to total assets: 12.8 / 13.8 / 10.4
  - Deposits and ST funding to total Assets: 76.2 / 75.4 / 79.4
  - Loans to total assets: 64.7 / 66.4 / 57.9
  - Loans/deposits and short-term funding: 91.8 / 100.7 / 83.2
  - Investments to total assets (1/ Investments in property, equity, and securities): 14.8 / 15.3 / 12.4
  - NPLs to total loans: 7.0 / 6.8 / 7.9
  - Liquid assets to total liabilities: 19.0 / 19.2 / 17.8
  - Capital adequacy ratio: 18.1 / 18.9 / 14.9
  - Return on equity (2/ Differences in return on equity and assets are due to differences in sample coverage): 13.8 / 14.0 / 13.3
  - Return on assets (2/ Differences in return on equity and assets are due to differences in sample coverage): 2.1 / 2.2 / 1.8
- Observations on these metrics:
  - IBs’ share of loans in total assets is lower than that of CBs by 10 percent.
  - IBs’ CAR averaged 14.9 percent in 2014, lower than CBs.
  - NPLs ratio for IBs stabilized around 7.9 percent in 2014, higher than for CBs.
  - IBs’ profitability: ROE 13.3 percent and ROA 1.8 percent in 2014.
  - IBs’ liquidity increased to 17.8 percent in 2014, slightly lower than CBs.

### Risks and Regulatory Gaps
- IBs face specific risks due to their unique business model, including:
  - Liquidity risk
  - Concentration risk
  - Shari’ah compliance risk
  - Displaced commercial risk
  - Investment risk
- Regulatory and supervisory gaps:
  - There is a law on Islamic banking, but no specific supervisory regime for IBs.
  - Islamic windows currently operate in a strict conventional regulatory framework.
  - No formal bank resolution framework, including no deposit guarantee scheme.
- Safety-net and liquidity arrangements in place or recently introduced:
  - Liquidity Support Facility (LSF) introduced during September 2008 crisis.
  - Interim Marginal Lending Facility (IMLF) introduced to provide overnight liquidity against collateral.
  - As of April 2015, the central bank extended eligible collateral to include Shari’ah-compliant securities other than CDs.

### Policy Recommendations and Reform Options
- Regulatory and supervisory regime:
  - Develop tailor-made regulation and risk-based supervision for IBs to capture IB-specific risks.
  - Implement targeted oversight of Islamic windows to reduce product-specific risks and ensure consumer protection.
- Shari’ah compliance risk mitigation:
  - Strengthen each bank’s Shari’ah Board by enforcing independence, transparency, and accountability.
  - Subject Shari’ah Board members to “fit and proper” requirements.
  - Accelerate establishment of a National Shari’ah Board with mandate to provide binding interpretation and fatwa on Islamic financial products to harmonize product features and ensure consistency across institutions.
- Governance:
  - Develop a tailor-made governance structure for IBs to enhance transparency and actively involve investment depositors in decision making, including allocation of funds and redistribution of profit.
- Macroprudential measures and reporting:
  - Consider defining tailor-made macroprudential tools to address IB liquidity and investment risks.
  - Introduce new specific reporting requirements aimed at enabling IBs to develop robust liquidity management.
  - Example: mudaraba deposits directed toward specific investments and as a balance sheet item might be excluded from the new liquidity ratio to be effectively implemented in 2015.
  - Include this instrument in the definition of Net Stable Funding Ratio (NSFR), to come into effect on January 2018.
- Safety nets and bank resolution:
  - Consider establishing explicit safety nets and banking resolution framework for the system as a whole, taking into account Islamic finance specificities.

*Source: IMF staff. Annex V. United Arab Emirates: Islamic Finance—Growth and Challenges (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15219.pdf_